With interest rates increasing, many buyers are looking at ways to bring down their payment costs. But is paying mortgage points, or discount points, to lower interest rates on a home loan worth the cost?

Cost of mortgage pointsPros and Cons of Buying Mortgage Points

Some things vary among lenders, but the price of mortgage points stays the same. The mortgage point, or discount, costs one percent of the loan amount. For example, one percent of a $400,000 loan would be $4,000.

The amount the mortgage point will save in interest is what varies from lender to lender. One mortgage point may decrease the interest rate by .15 percent bringing a six percent interest rate down to 5.85 percent or it could save a full .25 percent bringing a six percent interest rate down to 5.75 percent.

Some lenders allow you to buy multiple points, whereas others only allow you to purchase one or two points.

Recovering the cost

Paying for mortgage points lowers the interest rate but typically takes between five to ten years to recover the amount spent to buy down that interest rate.

Online calculators such as Mortgage Calculator allow buyers to see what the difference in the payment is based on the higher or lower interest rate. Comparing these two numbers will give an indicator as to how much will be saved in the monthly payment.

However, the mortgage points you are buying are similar to pre-paying interest and if you move to a new home or refinance the loan, you lose the extra money you have paid to buy mortgage points.

If you plan to stay in the home long-term (think 10+ years), paying for mortgage points will eventually be worth the cost. Ideally, look at the exact percentage of interest you save by buying mortgage points and find out where the "break even" point is. Your loan officer should be able to provide this information so you, the buyer, can make an informed decision.

Lowering your loan

Taking a higher interest rate by not buying mortgage points and putting the extra cash into the loan will give immediate equity. This lowers the loan amount and results in lower monthly payments. In theory, it's like you keep your cash by lowering your long-term loan debt and the extra interest you would pay on that loan amount.

This means it doesn't matter if you stay in the house the typical five to six-year average or less, you still have the money you saved on the mortgage when you sell the home.

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